Anyone who has had ECON 101 knows
that cutting spending during an economic downturn is a bad idea. With
unemployment hovering in the neighborhood of eight percent, cutting public spending
is a sure way to prevent the economy from coming back entirely from the
economic precipice. Wrangling at the state and federal level over deficits
points to either a surprising ignorance of this--which would be preferred, of
course, to the alternative--a deliberate effort to manipulate and mislead voters
for political reasons. In all
fairness, some people believe the path to growth is tax cuts for "job
creators"--the wealthy who invest. However, does this mean people who are not
"job creators" should not get tax cuts?

The recession

Generally, recessions are caused by decreases in demand for goods and
services measured over two (or more) consecutive quarters. In a recession,
businesses find they have excess capacity and thus no incentive to invest in
new plant and equipment--no matter how favorable are costs or interest rates. In
this environment total demand underperforms, as does employment. Total demand
for goods and services includes the sum consumer, and government spending. In a
downturn, therefore, private demand is insufficient, because of high
unemployment and real and perceived losses in asset values like falling real
estate values, evidenced by the rise in foreclosures, and a stalled new housing
construction market. The rising joblessness and exhausted unemployment
compensation reduce consumption; people whose asset values decline feel poorer
and reduce consumption. That leaves our maligned government (the people we
voted into office) essentially as the only player in the game. Government
spending can support demand when business and consumer spending sags. Another
effective way to boost consumer demand in a recession is to increase disposable
income with cut taxes. That's why extending the Bush tax cuts was a good idea.
Another strategy is to increase government spending for a multitude of
projects--new construction like fast trains; and the maintenance and the
updating of the existing infrastructure--roads and bridges. It's a little
shortsighted for New Jersey to reject funds for a tunnel project to NYC.
Florida, Ohio, and Wisconsin refused stimulus money for high-speed rail
projects. The actions of some state governors in refusing Federal government
stimulus money for infrastructure improvement will slow the recovery and
prolong high unemployment. One silver lining is that private sector job growth
is rebounding and this can overcome the cuts in government employment--and this
appears to be precisely just what is taking place in the current recession. And
recently this appears to have occurred. Going forward, the refusal of
stimulus funds for ideological or political reasons could undermine efforts to
grow the economy and reduce the jobless rate, and forestall the anemic economic
recovery.

Blame to go around

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You could blame credit ratings
agencies like Moody's for not doing their job, Fannie Mae and Freddie Mac, or
banks for sub-prime loans, and Wall Street greed, Democrats and Republicans, or
the poor for trying to live the American dream of house ownership by buying
homes they couldn't afford, all of these things for the debacle that plunged
the U.S. and the rest of the world into the worse global recession since the
Great Depression. But, balancing budgets by cutting spending, and rejecting
stimulus money won't put the economy back on the road to robust sustained
economic recovery soon, and could lead to a double dip recession. This is not a
miniscule concern: ignoring the argument for more spending has far-reaching
consequences for economic growth and employment. It matters little who's to
blame, unless there is some motivation for understanding what precipitated the
recession with a view for preventing it from happening again. But this
understanding might lead to the undesirable conclusion (at least in some
quarters) that more government regulations and spending are needed. We can't
have that because for some, it is not money--but government--the source of the
problem.

Budget balancing

The national debt is about $15 trillion and
growing. It grows when the deficit--when the government spends more than it
takes in, or when interest rates rise on the existing debt, or both. With
interest rates near zero, it seems like a good time for government to borrow
and spend. Why? Because money is
cheap. Targeted increases in taxes can reduce the deficit. A tax on the top 1
or 2 percent of taxpayers would raise revenue for the government without
harming consumer demand. For
instance, give a rich person a dollar he's unlikely to rush to the mall with
it; but a poor person would spend it. A tax cut on poor (or middle income)
taxpayers will increase demand, but a tax increase on the rich would not reduce
demand, class war, hardly. But if it were, the rich would win--they always do.
The net effect of this sort of targeting of tax policies is lower deficits,
more GDP growth and jobs. However, there's a caveat: if the goal is a balanced
budget (at all costs), then cutting spending in a recession when government tax
revenue falls would lead to more unemployment and more loss of government
revenue, and more deficits, necessitating still more cuts in government
spending. This cycle could repeat itself perhaps ad infinitum . You get
a balanced budget with a woefully anemic economy.

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Economic
recovery

Some people say recessions are the economy's
way of correcting bad decisions and inefficiencies in businesses. Inefficient
firms find a place in the business graveyard. Falling prices make U.S. goods
more competitive in the global market--so our exports increase and export sector
jobs rise. Lower consumer prices are equivalent to a tax cut, and Americans
with jobs will buy more. Here the government needs to step aside and let market
forces restore the economy to profitability, productivity, growth, and full
employment. Here the government is the problem because policy makers lack
complete foresight to step in at the right moment to right a wayward economy.
Pumping money into the economy will not increase output and might be
inflationary. With inflation a sliver above zero, issue of concern is not
inflation, but economic growth and jobs. Some stimulus to growth comes from
extending the Bush tax cuts, extending jobless benefits as the congress has
agreed to do for 2012. Apart from the unknown effects of the EU bailing out of
Greece, and the tensions with Iran leading to higher oil prices, the performance
of the US economy is encouraging. The stock market topped 13,000, so peoples
401(k)s, and mutual funds, and pension plans perform better, which also leads
to higher consumer confidence. Higher stock market generated wealth effect and
higher consumer confidence might translate into higher demand for the country's
goods and services.

Repealing health care, reigning in the EPA,
cutting social security, Medicare and Medicaid, defunding Planned Parenthood,
destroying unions, stripping funding of The Endowment for the Arts, and NPR,
seem to have the possible effect of reshaping the American economy into the
likeness of poor countries. Think
about it. Poor countries in Latin America, Africa, Asia, and the Middle East
are not known for universal health care services, monitoring environmental
quality, social security, family planning services, strong and effective
unions, and funding for the arts. A case could be made that developing
countries face major freedom of speech and of the press challenges. Radio and
TV outlets in developing countries are often government owned and controlled
news services. However, NPR is partially funded but not owned and controlled by
the government. But EU countries, North American, Canada, the UK, Australia and
other developed countries have in place services that benefit people--social
security, health care, unemployment compensation, and so forth. Whose company
do we wish to keep? Developed countries are rich because of labor laws and
employment legislation.* Why? Because labor laws and employment legislation
create certainty about worker welfare; workers are happier and therefore more
productive. We don't want our economy held hostage to and workers made victims
of mandatory balanced budget policies that can have deleterious effects of
economic growth.

*Employment and
labor laws: Comparing Ghana, South Africa and the United States, (with Greene,
Walter), Journal of African Business, 2004

Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)